No supply competition in OPEC+ alliance after Aramco’s refinery return to Europe
https://arab.news/8jyva
Saudi Aramco's total current refining capacity is around 5.4 million barrels per day for both domestic and international refineries. This gives Saudi Arabia one of the world’s largest refining capacities, fourth after the US with 18 million bpd, China with 17 million bpd, Russia with 6.7 million bpd, and it outperforms India, which has a refining capacity of 5 million bpd.
The news about Aramco buying a 30 percent stake in the Gdansk refinery of Polish firm Lotos came with suggestions that Aramco was stepping into Russia's backyard, which could spark supply competition in the OPEC+ alliance.
Why is Aramco back in the European refining sector?
This deal brings Aramco back to the European refining industry after selling its 50 percent share in the Greek refiner Motor Oil Hellas in 2005, but the Baltic Sea market for petroleum refined products has great potential regardless of growing crude and petroleum refined product imports from Russia and the US.
The 30 percent stake in the Lotos refinery strengthens Aramco’s position in northern Poland and also diversifies its crude supplies into the Baltic Sea region and Central Europe to refineries in Lithuania, the Czech Republic, and maybe even more.
Some market participants have argued that many Eastern European refineries were designed to mostly run Russian Urals crude grade for their refining configuration. Urals crude is a sour crude that has a sulphur content of about 1.5 percent and is close to Arabian Light crude oil in specification.
More importantly, however, Polish refiners were already processing Arabian Light crude oil before news broke of the Aramco refinery acquisition, in addition to processing crude spot supplies from Russia’s Urals, the North Sea, the US and West African grades on a spot basis.
It is a win-win partnership, for Aramco to broaden its presence in the European and Baltic Sea markets and for Polish refiners to diversify their crude oil supplies for energy security.
Even if Aramco crude oil supplies to Polish refiners reach 400,000 bpd, this will cover nearly half of the country’s crude requirement, leaving the other half to be supplied by spot market suppliers, including Russia.
Therefore, supply competition won't be an issue as some media outlets have suggested. I don't think that competition is an issue among OPEC+ members, as the global oil market is in vast need of supply regardless of any competition promoted in the media since OPEC+ started five years ago.
The competition isn't in crude oil supplies to Europe, but in petroleum refined product supplies to Europe, as European refining capacity has been declining in recent years to 14.5 million bpd from 85 operational refineries.
Faisal Faeq
Also, the floods of Russian ESPO crude exports by pipeline to the Asia Pacific region didn't spark competition earlier, and Saudi Arabia has remained the top supplier for major Asian refiners for many years.
The competition isn't in crude oil supplies to Europe, but in petroleum refined product supplies to Europe, as European refining capacity has been declining in recent years to 14.5 million bpd from 85 operational refineries.
Although this roughly matches the total EU refined product demand of around 13.5 million bpd, specific demand differs widely per oil product, country, and region. Therefore, this might create a significant imbalance if these mismatches are not alleviated with structural trade flows that Aramco and its trading arm, Aramco Trading, are capable of handling effectively.
The European refining sector is encountering competition with refineries being exposed to international competition and local environmental scrutiny at home, and this might hinder petroleum flows and further petroleum infrastructure investment in a new pipeline network, storage facilities, and new terminals. This is unlikely to put any pressure on refining margins in the region yet.
The increase of competing refined product imports raises the question about what the broader implications might be for the European refining sector from the increasing share of product imports.
Aramco's presence in the European refining industry comes at a time when its downstream presence is needed to bring many decades of downstream successes in international refining and joint ventures that have witnessed huge and successful expansions, like the ones that Aramco undertook in the S-Oil refinery in South Korea and the Port Arthur refinery in Texas, the largest refinery in the US.
This would also help European refiners to capitalize on this partnership and overcome the ongoing and upcoming challenges in the refining industry sector.
• Faisal Faeq is an energy adviser and columnist. He formerly worked with Saudi Aramco and the OPEC Secretariat. Twitter:@FaisalFaeq
